Today in History (1862) - The U.S. government forbids all Union army officers from returning fugitive slaves, thus effectively annulling the Fugitive Slave Law of 1850 and setting the stage for the Emancipation Proclamation. On the same day in 1865, the Confederate Congress voted to enlist 300,000 black troops, granting them freedom with the consent of their owners. Lee surrendered a few weeks later.

January 06, 2008

Shareholders Could Give Steve Jobs a Raise

by PG

Although I can give Prof. Bainbridge some sympathy for his federalism concern about "say on pay" Congressional legislation that would allow shareholders a non-binding, advisory vote on their boards' executive compensation decisions, his description of what the legislation would do verges on inaccurate. Even if he didn't write the headline "No need for federal regulations limiting executive compensation," he ought at least to have noted that it was erroneous when he linked the piece. "Say on Pay" doesn't limit executive compensation; it simply allows shareholders to express their opinion on this particular area of corporate governance. Those who have been as well done by as, say, Apple's shareholders in 2007 might vote to increase compensation for the executives responsible for the stock's success, and at minimum to approve the board's chosen pay package. If executive compensation is in some way broken, with pay insufficiently linked to performance, in some companies there might actually be a problem of under-compensating great performance, just as some companies overcompensate mediocre and poor performance.

I agree that Bainbridge knows about corporate law and governance -- contrary to his false modesty, knows an awful lot -- but it's unfortunate that his description of legislation is likely to mislead those who genuinely know "a little bit." He set off a stream of comments on his blog that indicate he successfully gave the impression to his readers who may not have read Obama's bill themselves that it caps compensation in some fashion.

For example, commenter Morgan declares that Obama is a "socialist" who "want[s] a common mediocrity." He seems to think he has made a killing point when he concludes by asking "are Obama and the rest going to try to do anything about athlete’s salaries?" Bainbridge utterly neglects the principal-agent problem that undergirds calls for shareholder democracy, and left ignorant about it, we get silly questions like that. Shareholders own corporations but do not have direct control over the compensation of executives; like most other decisions, this is delegated to a board the shareholders elect. In contrast, the owners of professional sports teams do get to decide how much the athletes are paid. George Steinbrenner, as principal owner of the New York Yankees, has a great deal more "say on pay" for A-Rod et al. than shareholders would get even under the proposed legislation.

Is your headline meant to be ironic? Since, as you point out, shareholders couldn't actually give a CEO a raise?

Posted by: Tom T. at January 6, 2008 10:57 PM

It's half a joke: yes, because the vote is non-binding, shareholders can neither increase nor decrease pay if the board doesn't follow the vote. However, I was also trying to say that the vote *could* just as well go in favor of increasing pay as decreasing it; there is nothing in the legislation itself that requires shareholders to vote in favor of decreased compensation.